The View from China's Productivity Frontier
To continue moving forward, China may need to think about labor and productivity in new ways. One example is embracing policies and programs that support vocational as well as university education. Others include allocating more capital for private-sector investments and identifying ways to leverage an aging workforce.

Days of Miracles Are Waning.” Years of Slowing GDP Growth.” As if the headlines weren’t sobering enough, one book advances an especially grim scenario—a collapse” in Chinese growth that will send the world into global depression.”

Is the situation indeed dire?

China’s GDP growth has in fact cooled from its double-digit pace of the past three decades. All things are relative, of course. Growth was 7.8 percent in 2012 and remained in the neighborhood of 7.5 percent for 2013 when this article was published—figures more than triple the growth rate in the United States in 2012. And Chinese leaders have signaled their intent to maintain at least that level of growth. But the warning signs of further slowing can’t be ignored.

The country’s unparalleled growth since 1979 has been built largely at the intersection of two powerful forces: While tens of millions of new workers have flooded in from the countryside to power China’s industrial economy, the government has made huge investments in factories, urban infrastructure and heavy machinery. However, the country now faces a pair of major bottlenecks. First, its population is rapidly aging, and the size of the labor force is likely to plateau by 2016. Second, the pace of capital investment growth is expected to slow as Beijing seeks to rebalance the economy in favor of more consumption.

China doesn’t have to accept slower growth as inevitable. But to avoid this, it must get more out of what it has—greater productivity from its people and more bang from its yuan. Both are achievable if policy makers and company leaders start to make changes now.

The labor crunch

Click to Enlarge After decades of rural migration to urban centers and with it a steadily growing supply of low-cost labor, the numbers have been trending downward—rapidly (see chart). It’s not hard to see why: There is a rapidly shrinking pool that will eventually disappear.

Other demographic trends are equally unfriendly to sustained rapid growth. China’s population is aging, with the 60-and-above age bracket set to rise from about 12 percent of the population in 2010 to 34 percent in 2050. And as the population ages, the ratio of those employed to the total population will steadily drop—to the point where, in the International Monetary Fund’s estimate, the country’s excess labor supply (the reserve of unemployed and underemployed workers) will have all but evaporated by 2025. And as the labor supply dwindles, wages will inevitably rise.